What is this Development Impact Bond (DIB) about?
Money for development is too often spent with little understanding of the results that the investment achieves. The Quality Education India DIB only funds educational outcomes, rather than educational activities, to ensure maximum impact is achieved with the funds invested. The DIB aims to nudge the culture of development and philanthropy towards more outcomes-based funding. At the same time, the world’s development challenges can not be solved through traditional donor grantmaking alone. New sources of finance must be unlocked to close the estimated $2.5 trillion annual funding gap needed to achieve the Sustainable Development Goals (SDGs).
What is unique about this DIB?
The Quality Education India DIB is the world’s largest education DIB, currently valued at $11 million but with ambitions to double in size. Its scale reduces the proportion of funds spent on transaction costs, which are static regardless of the overall size. It is the first education DIB to involve multiple outcome funders and implementation partners. This coalition of public and private sector partners includes Indian philanthropists, UK development organisations, global corporates, the Indian diaspora, US philanthropists, and a seasoned risk investor specialising in DIBs. It is the first DIB to involve an Indian outcome funder.
How have the NGO implementing partners been chosen?
The local NGOs have been carefully selected from a longlist of NGOs, based on the type and quality of educational services they offer. These NGOs run successful outcomes-based programmes and the DIB enables them to successfully scale up their interventions.
Why is a risk investor confident investing in this DIB?
UBS Optimus Foundation has a proven track record in the impact bond sector having been the investor in a successful pilot DIB with Educate Girls. That experience has enabled the Quality Education India DIB to launch on a much larger scale. Evidence of what does and does not work, and the cost of implementation, is gathered and analysed over the course of the DIB through annual assessments. Data-driven decisions can be made to modify implementation and reduce risk so that investors’ money is used to maximum effect during the lifetime of the DIB.
Why involve a risk investor and pay them a return when donors could simply apply their own outcomes criteria for funding?
The element of risk in an investment is vital as it incentivises an additional degree of rigour and performance management that would otherwise be lacking. In the DIB it is the investor that holds the financial risk of under performance, unlike in other payment-by-results arrangements where the service provider carries the risk of not being paid if results are poor.
The DIB model applies discipline to development funding and although it is currently an immature market, it has expanded rapidly in recent years and looks set to continue growing. The financial potential of DIBs and other outcomes-based funding models is enormous – if just 1% of global capital market investment was dedicated to outcomes-funding, the $2.5 trillion annual SDG funding gap would be met.
Why does the investor receive a financial return in the event of success? Aren’t they making money that could be donated elsewhere?
Almost 80% of the DIB’s value will go to the local NGO implementing partners. The risk investor, UBS Optimus Foundation, will only receive a maximum 8% return if the outcome targets are achieved. As a foundation, UBS Optimus is limited to philanthropic capital – so any return that is made will be recycled for the social good. The risk and return model incentivises outcomes achievement in a way that traditional grantmaking doesn’t.
Does the DIB encourage private sector involvement in public services?
The private sector has an important role to play in development. Public-private collaboration can unlock investment in development programmes that would otherwise be neglected due to risks that the public sector alone would not be willing to carry. This private risk investment incentivises all parties to achieve outcomes and maximise social impact. The private sector also has an important role to play in pushing for better governance, policy reform, transparency, and anti-corruption. Given corporates’ social responsibility, DIBs are an efficient and effective means of facilitating their investment in social development.
How are outcomes paid for?
The outcome funders make annual payments in proportion to the improvement in children’s learning, as verified by an independent assessor. At the end of the four-year DIB, if the implementing partners succeed in achieving the outcome targets, the investor will earn up to 8% return on its investment, and the implementing partners will also receive bonus payments. However, if the outcomes are not achieved, the investor risks losing its investment as the outcome funders will not make sufficient payments.
Is this a form of payment-by-results?
Yes, the DIB is a form of payment-by-results. The DIB is an innovative and pioneering model of development financing that holds huge potential for growth. A pilot DIB with Educate Girls was a tremendous success, achieving 160% of its target outcomes. DIBs are not a silver bullet and they will not be suitable for all the challenges faced in different development contexts. The partners in the Quality Education India DIB all share an appetite to take risks and use any lessons learned to catalyse further innovation in development financing. Only by testing bold new approaches will we be able to achieve the impact at scale needed if we are to realise the Sustainable Development Goals, including ensuring quality education for all.